Goldman says these stocks with increasing profitability will beat the market this year

Published Mon, Jan 22 20243:13 PM ESTUpdated Mon, Jan 22 20243:59 PM EST

With the market soaring to new heights in anticipation of lower interest rates, investors should look to long-term growth plays, according to Goldman Sachs. The firm rebalanced its return on equity growth basket of stocks, which is sector-neutral to the S & P 500. It contains 50 names with the highest consensus expected ROE growth over the next 12 months. "The start of Fed easing means the risk of rising borrow costs will decline. Our baseline expectation for 2024 is that ROE will expand slightly, driven primarily by EBIT margin improvement," David Kostin, Goldman's chief U.S. equity strategist, wrote in a Friday note to clients. "We expect investors will rotate away from stocks that offer the safety of high profitability today towards those which offer the potential for greater profitability in the future." ROE, which is calculated by dividing a company's net income by shareholders' equity, is a widely followed measure used to track profitability. Although the first interest rate cut could come later than expected and at a slower pace this year, the Federal Reserve is still anticipating three rate cuts ahead. Kostin expects headwinds from taxes and borrowing costs to subside, driving higher equity returns. He sees the broad market index ending 2024 at 5,100, which is about 5.4% higher than Friday's close. Stocks with greatest expected ROE growth include gold mining company Newmont , wireless infrastructure real estate investment trust American Tower , chipmaker Advanced Micro Devices and toy manufacturer Hasbro , according to Goldman. All of these stocks have an ROE above 35%. Of the basket, AMD is one of the names that has already generated strong returns so far this year, up 14% in 2024. Optimism around artificial intelligence powered AMD shares to a 127% gain in 2023. Late last year, the company rolled out a new AI chip , going toe to toe against Nvidia. Though nearly 80% of analysts covering AMD rate it a buy or strong buy, consensus price targets suggest downside of nearly 12% from here, per LSEG, formerly known as Refinitiv. Newmont has an ROE of 50% — the highest of the basket. Though shares are down more than 15% to start the year, the stock has picked up a bit on Monday as gold prices pull back, potentially creating a buying opportunity. UBS is particularly bullish on gold prices in 2024, estimating that the precious metal could end the year as much as 10% above current levels due to potential rate cuts. Of the 21 analysts covering Newmont, 13 either rate it a buy or strong buy, according to LSEG. Consensus price targets suggest nearly 45% upside from current levels. American Tower is another name featured in Goldman's basket. Analysts have a consensus rating of buy on the stock, and they foresee nearly 13% upside, per LSEG. The communications-focused REIT has the second-highest expected ROE growth — 48% — of the names on Goldman's list. In addition to these names, Netflix and T-Mobile are also among the names in Goldman's ROE growth basket. Citigroup also made the cut.